1. Bottlenecks and Oil Price Spikes: Impact on U.S. Ethanol and Agriculture Chad Hart Center for Agricultural and Rural Development Iowa State University chart@iastate.edu 515-294-9911 Kansas State University Manhattan, Kansas October 5, 2007

2. Outline Based on an update of our earlier study “Emerging Biofuels: Outlook of Effects on U.S. Grain, Oilseed, and Livestock Markets” http://www.card.iastate.edu/publications/synopsis.aspx?id=1050 Updated with available 2006 and 2007 data The objective is to estimate: how large the biofuels sector in the U.S. could become the impact of the biofuels sector on crops markets, trade, and on livestock markets the response of world agricultural markets

3. Model Interactions

4. Current ethanol capacity: 129 plants, 6.88 billion gallons/year Total capacity under construction and expansion: 6.77 billion gallons/year 76 new ethanol plants and 10 expansion projects underway 2.2 billion bushels of corn were used in producing fuel ethanol in 2006/2007 marketing year. 3.2-3.5 billion bushels of corn are expected to be used in producing fuel ethanol for 2007/2008 marketing year. U.S. Ethanol Industry

5. Key Determinants of Impacts Crude oil prices Used NYMEX futures prices as a guide Policy incentives in the U.S. $0.51/gallon ethanol blenders credit $0.54/gallon import duty and 2.5% import tariff The “E-85 bottleneck”: the location and quantity of flex-fuel vehicles and E-85 pumps

6. Three Cases Baseline Current policies, “normal” weather Higher oil prices throughout projection period Adding $10/barrel to the crude oil price Drought in the 2012 crop year Placing a 1988-style drought in the middle of the projection period

7. Projected U.S. Ethanol Production

8. Projected U.S. Dry Mill Margins

9. Margins at Various Corn and Gasoline Prices

10. Wholesale Gasoline and Ethanol Prices

11. Projected U.S. Corn Planted Area

12. Projected Utilization of U.S. Corn

13. Projected U.S. Corn and Soybean Prices

14. Projected U.S. Soybean Planted Area

15. Projected U.S. Biodiesel Production

16. Projected U.S. Meat Production

17. Projected U.S. Retail Meat Prices

18. Projected Brazilian Ethanol Production

19. Projected Ethanol Production

20. Projected Argentine Area Harvested

21. Projected Brazilian Area Harvested

22. Impact of Higher Crude Oil Price Increased crude oil price by $10/barrel over the projection Margins on ethanol plants increase New incentive to invest in added capacity for ethanol production Eventually, a new equilibrium reached where there is no incentive to invest in or exit the ethanol industry Will demand for ethanol be enough? E-10 market will saturate around 15 billion gallons Drop in ethanol price will eventually encourage increase in demand for the flex-fuel cars

23. Projected U.S. Ethanol Production

24. Projected U.S. Dry Mill Margins

25. Wholesale Gasoline and Ethanol Prices

26. Projected U.S. Corn Planted Area

27. Projected Utilization of U.S. Corn

28. Projected U.S. Corn and Soybean Prices

29. Projected U.S. Soybean Planted Area

30. Projected U.S. Biodiesel Production

31. Projected U.S. Meat Production

32. Projected U.S. Retail Meat Prices

33. U.S. Meat, Egg, and Dairy Price Changes BaselineScenarioPercentage Change Beef Retail Price ($/pound) 4.524.622.2% Pork Retail Price ($/pound) 3.303.351.5% Broiler Retail Price ($/pound) 1.962.002.0% Turkey Retail Price ($/pound) 1.261.303.2% Egg Retail Price ($/dozen) 1.631.683.1%

34. Farm to Retail Food Price Spread FoodFarm Value Share of Retail Food Price FoodFarm Value Share of Retail Food Price Eggs53Canned Corn22 Beef49Sugar27 Chicken48Wheat Flour19 Milk34Bread5 Pork31Corn Flakes4 Orange Juice33Corn Syrup3 Source: USDA-Economic Research Service, 2001

35. Impact on Rest of the World World grain and oilseed prices increase Result in higher feed and food prices Higher food prices Higher livestock production cost Countries in South America and Asia fill the gap

36. Impact of Short Crop Scenario Drought in 2012 similar to 1988 Regional yields of corn, soybeans and wheat changed from trend levels Yields were off by 25% for corn, 18% for soybeans, and 11% for wheat in 1988 Ethanol mandate for 2012 assumed to be 14.7 billion gallons

37. Historical Corn Production Deviations

38. Corn, Soybean and Ethanol Markets Corn price increases by 44% above baseline levels Soybean price rises by 22% Corn exports and stock levels decline by more than 60% Corn exports from South America, China, etc. fill part of the gap from decline in U.S. corn exports Corn feed use declines by 16% (switch to other feeds) Ethanol trade increases moderately

39. Livestock Market Higher feed costs affect the livestock sector but to a lesser extent as shock is perceived as temporary Production declines Broiler production declines the most (over 2.5%) Milk production declines the least (0.5%) Retail prices increase Egg prices increase the most (about 5.5%) Prices of other products increase by a range between 2% and 4%

40. Thank You